The Bank of Canada is confused. And when it’s confused, it stops what it’s doing until it figures things out.
Canada’s central bank left its benchmark interest rate unchanged at 1.75 per cent on March 6 and signalled that policy has entered an extended period of stasis.
Stephen Poloz, the governor, and his deputies on the Governing Council expected slower global economic growth, but the slowdown has been “more pronounced and widespread” than forecast in January, the central bank said in its latest policy statement.
Similarly, they assumed Canada’s economy would stumble, but the fall in the fourth quarter was “sharper and more broadly based” than they predicted, the statement said.
After economic growth of three per cent in 2017, and 1.8 per cent in 2018, the central bank is bracing for a period of subdued economic activity.
Years of outsized borrowing appears to have caught up with households, which have cut their spending significantly
The recalibration was made necessary by Statistics Canada’s latest tally of gross domestic product, which shows the economy nearly stalled in the fourth quarter.
Years of outsized borrowing appears to have caught up with households, which have cut their spending significantly.
The housing market no longer is red hot. Exports and business investment have gone cold, as weak oil prices and the trade wars sap business confidence.
Policy makers said the gap between actual economic output and its estimate of what the economy can produce without stoking inflation is wider, although they won’t have a new estimate until April.
Still, the central bank is less worried about losing their grip on prices, meaning it can leave borrowing costs low for longer.
“Governing Council judges that the outlook continues to warrant a policy interest rate that is below the neutral range,” which is 2.5 per cent to 3.5 per cent, the statement said.
“Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”
Those words suggest the Bank of Canada’s slow march to higher interest rates in now on hold, perhaps until 2020. There was no hint in the central bank’s statement that policy makers contemplated cutting interest rates.
The goal remains getting back to higher levels, eventually.
“With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets and global trade policy,” the statement said.
Some on Bay Street and Wall Street — and in Calgary — might have wanted a more declarative statement of alarm from Canada’s central bank.
In the United States, the Federal Reserve has made sure that everyone knows that it is no longer inclined to raise interest rates, even though the economy grew at an annual rate of almost three per cent in the fourth quarter.
StatCan reported March 1 that GDP grew at an annual rate of 0.4 per cent in the fourth quarter, less than half as fast as what the Bank of Canada predicted in January.
If there was a North American central bank that needed to pivot, you might have thought it was the Canadian one.
But the Fed and the Bank of Canada are in different places. The U.S. dollar is strong and constraining financial conditions; the Canadian currency is so weak that it’s probably undervalued, according to Derek Holt, an economist at Bank of Nova Scotia.
And inflation in Canada still is higher than benchmark interest rate, suggesting borrowing costs remain stimulative. The Bank of Canada did a half pivot in January, when it said it planned to take the benchmark rate to a neutral setting “over time.” Those two words reflected deteriorating economic conditions and showed that policy makers were in no rush to raise interest rates. They are in even less of a hurry now.
• Email: kcarmichael@nationalpost.com | Twitter: carmichaelkevin
